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Chapter 15
Business Alliances:
Joint Ventures, Partnerships, and Alliances
Solutions to End of Chapter Discussion Questions
15.1 What is a limited liability company? What are its advantages and disadvantages?
15.2 Why is defining the scope of a business alliance important?
15.3 Discuss ways of valuing tangible and intangible contributions to a JV.
15.4 What are the advantages and disadvantages of the various organizational structures that could be
employed to manage a business alliance?
15.5 What are the common reasons for the termination of a business alliance?
15.6 In 2005, Google invested $1 billion for a 5 percent stake in Time Warner’s America Online unit as
part of a partnership that expands their existing search engine deal to include collaboration on
advertising, instant messaging, and video. Under the deal, Google will have the usual customary
rights afforded a minority investor. What rights or terms do you believe Google would have
negotiated in this transaction? What rights or terms do you believe Time Warner might want? Be
specific.
15.7 In late 2004, Conoco Phillips (Conoco) announced the purchase of 7.6 percent of Lukoil’s (a
largely government owned Russian oil and gas company) stock for $2.36 billion during a
government auction of Lukoil’s stock. Conoco will have one seat on Lukoil’s board. As a
minority investor, how could Conoco protect its interests?
3
15.8 In 1999, Johnson & Johnson (J&J) sued Amgen over their 14-year alliance to sell a blood-
enhancing treatment called erythropoietin. The relationship had begun in the mid-1980s with J&J
helping to commercialize Amgen’s blood-enhancing treatment, but the partners ended up
squabbling over sales rights and a spin-off drug. The companies could not agree on future
products for the JV. Amgen won the right in arbitration to sell a chemically similar medicine that
can be taken weekly rather than daily. Arbitrators ruled that the new formulation was different
enough to fall outside the licensing pact between Amgen and J&J. What could these companies
have done before forming the alliance to have mitigated the problems that arose after the alliance
was formed? Why do you believe they may have avoided addressing these issues at the outset?
15.9 In late 1999, General Motors (GM), the world’s largest auto manufacturer, agreed to purchase 20%
of Japan’s Fuji Heavy Industries, Ltd., the manufacturer of Subaru vehicles, for $1.4 billion.
Why do you believe that General Motors may have wanted to limit initially its investment to 20%?
15.10 Through its alliance with Best Buy, Microsoft is selling its products—including Microsoft
Network (MSN) Internet access services and hand-held devices such as digital telephones, hand-
held organizers, and WebTV that connect to the Web—through kiosks in Best Buy’s 354 stores
nationwide. In exchange, Microsoft has invested $200 million in Best Buy. What were the
motivations for this strategic alliance?
Solutions to End of Chapter Case Study Questions
Google and Walmart Partner to Compete with Amazon
Discussion Questions:
1. What were the primary motivations for Walmart and Google to create a partnership?
2. What are the goals of the partnership? Do you believe it will be successful in achieving these
goals? Why? Why not?
4
3. What are the major hurdles the partnership must overcome and why?
4. In the 1980s and 1990s, companies such as IBM, AT&T, and Microsoft were investigated
by the Justice Department because they were viewed as wielding monopolistic power. Do
you believe the government should investigate Amazon because it may be engaging in
noncompetitive practices? Why? Why not?
5. What alternatives to a partnership with Google did Walmart have? Why was partnership selected
as the means of implementing the firm's voice-activated online ordering strategy?
Examination Questions and Answers
1. Business alliances may represent attractive alternatives to mergers and acquisitions. True or False
2. A joint venture is rarely an independent legal entity such as a corporation or partnership.
True or False
3. Strategic alliances generally create separate legal entities in order to achieve their business
objectives. True or False
5
4. Obtaining additional investment funds from others is the primary motivation for creating various
types of alliances. True or False
5. Major motivations for business alliances include risk sharing as well as gaining access to new
markets and skills. True or False
6. A cross-marketing relationship is one in which one party to the agreement agrees to sell to its
customers the products or services of another firm. True or False
7. Purchaser-supplier relationships are also called logistics alliances. True or False
8. Companies wishing to do business abroad often enter into an alliance with an indigenous company
to facilitate entry into a foreign market. The foreign company is usually the majority owner in
such relationships. True or False
9. Foreign companies having a minority ownership position in international business alliances rarely
have control over the alliance even though they may possess much of the expertise required to
manage the alliance. True or False
10. Parent firms sometimes contribute a subsidiary to a partnership as a prelude to eventually exiting
that business. True or False
11. U.S. antitrust regulatory authorities generally view the creation of R&D alliances among
businesses in the same industry as anticompetitive, even if the alliance shares its research with all
alliance participants. True or False
12. Poorly defined roles and responsibilities are an important factor contributing to the failure of many
alliances to achieve their objectives. True or False
13. A corporate legal structure is seldom used in implementing business alliances, because it may be
subject to double taxation and significant set up costs. True or False
14. Unlike other legal structures, a corporate structure does not have to be dissolved because of the
death of the owners or if one of the owners wish to liquidate their ownership position.
True or False
15. The major disadvantages of a sub-chapter S corporation are that the number of shareholders is
limited, corporate shareholders are excluded, it must distribute all of its earnings, the liability of
shareholders is limited, and it can issue only one class of stock. True or False
16. Strategic alliances often make use of written contracts rather than more formal legal structures
such as a corporation. True or False
17. In limited liability companies, owners must also be active participants. True or False
18. In setting up business alliances, the initial focus of the parties involved should be on determining
the appropriate legal structure. True or False
19. In terms of important deal structuring issues, scope outlines how broadly the alliance will be
applied in pursuing its purpose. True or False
20. Failure to define scope adequately can result in situations in which the alliance may be competing
with the products or services offered by the parent firms. True or False
21. How ownership interests will be transferred in a business alliance is a relatively unimportant deal
structuring issue. True or False
22. Who receives rights to distribute, manufacture, acquire or license technology, or purchase future
products or technology is an issue usually resolved in defining the scope of the alliance.
True or False
23. Equity owners or partners usually make contributions of cash or assets in direct proportion to their
ownership or partnership interests. If one party chooses not to make a capital contribution, the
ownership interests of all the parties are adjusted the changes in their cumulative capital
contributions. True or False
24. JVs established as partnerships typically raise capital through increased contributions from
existing partners or through the issuance of limited partnership interests to investors, with the
sponsoring firms becoming the general partners. True or False
25. In partnerships, the allocation of profits and losses among partners will normally follow directly
from the allocation of shares or partnership interests. True or False
26. Termination provisions in the alliance agreement should not include buyout provisions enabling
one party to purchase another’s ownership interests. True or False
27. The success rate among business alliances is usually much higher than for mergers and
acquisitions. True or False
28. The number of business alliances established each year is usually much smaller than the number
of mergers and acquisitions. True or False
29. Empirical studies show that the business alliance announcements seldom have any impact on the
market value of their parent firms. True or False
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30. Alliance agreements must be flexible enough to be revised when necessary and contain
mechanisms for breaking deadlocks, transferring ownership interests, and dealing with the
potential for termination. True or False
31. The desire to share risk is a common motive for a business alliance. True or False.
32. Business alliances usually exist for decades. True or False
33. Business alliances often receive favorable antitrust regulatory treatment. True or False
34. Joint ventures sometimes represent good alternatives to an outright merger. True or False
35. With respect to joint ventures, so-called distribution issues relate to dividend policies and how
profits and losses are allocated among the owners. True or False
36. In general, business alliances are not intended to become permanent arrangements. True or False
37. Joint venture and alliance agreements often limit how and to whom parties to the agreements can
transfer their interests. True or False
38. Control of business alliances is most often accomplished through a steering committee. True or
False
39. Business alliances generally do not exhibit a higher success rate than mergers and acquisitions.
True or False
40. Business alliances may represent attractive alternatives to merges and acquisitions. True or False
41. Business alliances may assume a variety of legal structures. True or False
42. The written contract is the simplest legal structure and most often is used in strategic alliances.
True or False
43. The automotive industry rarely uses alliances to provide additional production capacity,
distribution outlets, technology development, and parts supply. True or False
44. Project-oriented JVs often are viewed unfavorably by regulators. True or False
45. Successful alliances are usually characterized by partners who have attributes that either
complement existing strengths or significant weaknesses. True or False
46. Successful alliances are often those in which the partners contribute money, which is generally
more important than a specific skill or resource. True or False
47. Successful alliances generally do not hold managers directly accountable for their actions, since
that would tend to stifle risk taking. True or False
48. The length of time an alliance agreement remains in force depends on the partners’ objectives, the
availability of resources needed to achieve these objectives, and the accuracy of the assumptions
on which the alliance’s business plans are based. True or False
49. Top management of the parents of a business alliance should not involve themselves aggressively
and publicly, as this may tend to stifle alliance management’s risk taking and creativity. True or
False
50. The choice of legal structure should be made before the parties to the business alliance are
comfortable with the venture’s objectives, potential synergy, and preliminary financial analysis of
projected returns and risk. True or False
51. Efforts to insist on a detailed written agreement or contractual relationship may be viewed as
offensive in some cultures. True or False
52. Unlike other legal forms, the C corporate structure has an indefinite life as it does not have to be
dissolved as a result of the death of the owners or if one of the owners wishes to liquidate their
ownership position. True or False
53. Under a C corporate structure, ownership can be easily transferred, which facilitates raising
money. True or False
54. Because the limited liability company offers its owners the significant advantage of greater
flexibility in allocating profits and losses and because the LLC is not subject to the many
restrictions of the S-Corporation, the popularity of the S-corporation has increased. True or False
55. Unlike a limited partnership, the LLC is taxed on all profits before they are paid out to its
members. True or False
56. Unlike limited partnerships, LLC organization agreements do not require that they be dissolved in
case of the death or retirement or resignation of any member. True or False
57. The life of the LLC is determined by the owners and is generally set for a fixed number of years in
contrast to the typical unlimited life for a corporation. True or False
58. Equity partnerships commonly are used in purchaser–supplier relationships, technology
development, marketing alliances, and in situations in which a larger firm makes an investment in
a smaller firm to ensure its continued financial viability. This is important because it ensures one
partner has dominant control over the partnership. True or False
59. The formation of a successful alliance requires that a series of issues be resolved before signing an
alliance agreement. True or False
60. An alliance whose purpose is to commercialize products developed by the partners generally
should be broadly defined in specifying what products or services are to be offered, to whom, in
what geographic areas, and for what time period. True or False
1. Which of the following are examples of business alliances?
a. Mergers
b. Acquisitions
c. Joint ventures
d. Equity partnerships
e. C and D
2. Which of the following is not a typical characteristic of a licensing arrangement?
a. Obtaining the rights to use a particular type of technology.
b. Obtaining a controlling interest in another firm
c. Obtaining patent rights
d. Paying royalties in direct proportion to revenues generated by the agreement
e. Utilizing another firm’s trademark to market your product
3. Which of the following is not a motivation for establishing an alliance?
a. Risk sharing
b. Gaining access to new markets
c. Gaining access to a new technology
d. Achieving maximum control
e. Entering into a foreign market
4. Which one of the following is not a characteristic of a corporate legal structure?
a. Unlimited liability
b. Double taxation
c. Continuity of ownership
d. Managerial autonomy
e. Ease of raising money
5. Which of the following is not a typical question that must be addressed in defining scope?
a. Which products are included
b. Which products are excluded
c. How are profits are losses to be allocated
d. Who receives rights to distribute, manufacture, acquire, or license or purchase future
products developed by the alliance
e. Which partner will sell which products in which markets
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6. Which of the following is not a typical question that must be addressed in defining how ownership
interests will be transferred?
a. What are the restrictions on transfer
b. How will new alliance participants be treated
c. Will there be a right of first refusal
d. How is the alliance to be managed
e. Will there by drag along, tag along, or put provisions
7. Business alliances typically use which of the following ways to finance ongoing capital
requirements?
a. Request participants to make a capital contribution
b. Issuing additional equity or partnership interests
c. Borrowing without partner guarantees
d. A and B only
e. A, B, and C
8. JV and alliance agreements often limit how and to whom parties to the agreement can transfer
their interests. These limitations include which of the following mechanisms?
a. Tag-along provisions
b. Drag-along provisions
c. Put provisions
d. A, B, and C
e. A and B only
9. Methods of dividing ownership and control in business alliances may take which of the following
forms.
a. Majority-minority framework
b. Equal division of power framework
c. “Majority rules” framework
d. Multiple party framework
e. All of the above
10. Antitrust regulatory authorities tend to look most favorably on which type of alliances?
a. Equity partnerships
b. Marketing alliances among competitors
c. Global alliances
d. Project oriented ventures involving collaborative research
e. None of the above
11. In general, business alliances are not intended to become permanent arrangements. All of the
following are common reasons for terminating such arrangements except for
a. Diverging objectives of the partners
b. Successful operations resulting in merger of the partners
c. Completion of the project
d. Unexpectedly favorable financial performance
e. Antitrust considerations
12. Termination provisions in alliances commonly include all but which of the following:
a. Buyout provisions enabling one party to purchase another’s ownership interests
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b. Predetermined prices at which the buyouts may take place
c. Breakup payments payable to the remaining partners
d. How assets and liabilities will be divided among the partners
e. What will happen to patents and licenses owned by the alliance
13. If one party chooses to exit an alliance, the remaining party or parties often have the contractual
right to
a. First offer their ownership interests to the other partners
b. Sell their ownership interests to the highest bidder
c. Put their interests to a third party that has no relationship to the alliance
d. Require that the other parties to the alliance buy them out
e. Dissolve the partnership
14. Which of the following is generally not true of a business alliance?
a. Tax considerations are often the primary motivation for forming the alliance
b. The events triggering dissolution of the alliance are generally spelled out
c. Remaining partners have a right of first refusal if one partner chooses to exit the
partnership
d. One partner is generally responsible for day-to-day operations
e. Allocation of profits and losses follow from the allocation of shares or partnership
interests
15. Which of the following is generally true about financing JVs and partnerships?
a. Lenders rarely require guarantees from the parents
b. Bank loans are commonly used to meet short-term cash requirements
c. Participants must agree on an appropriate financial structure for the organization
d. Contributions by the partners of intangible assets are usually easy to value
e. Corporations are an uncommon form of legal structure
16. Autos R Us and Pre-owned Inc represent used car dealers that compete in the same city. These
competitors each invest $15 million to form a new, jointly owned company, Real Value Inc, that
will sell cars in a nearby city. The new firm is best described by which of the following terms:
a. Merger
b. Acquisition
c. Leveraged buyout
d. Joint venture
e. Consolidation
Case Study Short Essay Examination Questions
GENERAL MOTORS HEDGES ITS BETS WITH AN INVESTMENT IN
RIDE HAILING FIRM LYFT
________________________________________________________________
Case Study Objectives: To illustrate how business alliances can
• Manage risk and
• Leverage financial and nonfinancial resources
__________________________________________________________________________
In an era in which rapid changes in technologies are reshaping the long-standing business models of most
companies, senior managers find themselves having to gaze into the future to anticipate rather than simply
react to market changes. The automotive industry is no exception. Those that will survive long-term must
make educated guesses about what lies ahead in terms of how people will chose private versus public
12
modes of transportation. While the latter has long represented an alternative in areas of high population
density, new trends are emerging that represent both a threat and an opportunity to the traditional passenger
vehicle.
Among the economic and social developments likely to impact the mode of transportation in high
density affluent areas is the advent of autonomous (or self-driving) cars and ride-hailing services (like Uber
and Lyft).1 Consequently, firms both within the car manufacturing industry and major technology
companies are seeking ways to exploit changes in the giant automotive transportation market. Ride hailing
companies using autonomous driving car technology have the potential to substantially erode consumers'
desire to own motor vehicles, particularly in urban areas, and in turn to reduce auto makers' sales and
profits.
Automotive executives are keenly aware of the potential for ride-hailing services to reduce the demand
for owning or leasing cars in urban areas. However, opportunities for automakers do exist. Even if the
industry's passenger car sales decline, the number of miles driven by cars can actually increase as cars
remain the preferred mode of transportation nationwide. Car companies see the potential to offer paid
services to take advantage of all the miles driven by the current fleet of cars, which in the U.S. exceeds 100
million vehicles. Such paid services could provide a significant source of future income in addition to the
more traditional sale of cars and replacement parts.
The future may consist of company owned autonomous cars constantly shuttling people back and forth
rather than simply cars owned by individuals remaining in garages or parking lots a large percentage of
each day. Car companies with paid mobility services see themselves earning money on the number of
miles driven rather than simply on the actual sale of cars. In recognition of this emerging trend, Ford
announced in 2015 that it was increasingly thinking of itself as a mobility company rather than an
automotive company.
The growing popularity among consumers of ride-hailing indeed portends a major paradigm shift in the
way we travel. But the capital requirements to make it happen are proving to be huge. Uber has been unable
to sustain its rapid growth through internal financing. In mid-2016, Uber announced publicly plans to raise
billions of dollars from investors and creditors. Smaller competitors such as Lyft acutely aware of the
amount of capital required to compete with Uber pursued various options ranging from partnerships to
seeking minority investors to sale of the business.
After having tried unsuccessfully to sell itself to General Motors, Apple, Google, Amazon, Uber, and
Chinese ride hailing firm Didi Chuzing, U.S. based Lyft Inc. initiated a new round of funding in early 2016
raising more than $1 billion. This included a $500 million investment by General Motors (GM). Other
investors in the equity offering included Saudi Arabia’s Kingdom Holding Co., Janus Capital Management
LLC and Japanese e-commerce firm Rakuten. The financing valued Lyft at $5.5 billion, more than double
its valuation in its prior financing round in early 2015.
The deal marks the first time a major car maker has joined with a ride-hailing company. GM and Ford
are among a cadre of car makers interested in developing their own “alternative” autonomous driving
capabilities either alone or in partnership with other firms. This comes at a time when large technology
firms including Uber, Alphabet (Google’s parent), and Apple Inc. are seeking to increase their role in the
personal transportation market.
Founded in 2012, Lyft helped promote the popularity of the ride-hailing craze in the United States. Lyft
users can summon a private car using a mobile phone app. Lyft says it now completes 7 million rides per
1 Firms like Uber and Lyft often referred to themselves as ride sharing services. Others prefer to use the
term ride hailing services. In practice, most of what Uber and Lyft provide to users is the ability to hail a
private car using a mobile phone app. In most instances, you are not actually sharing a ride with other
paying customers. Consequently, in this case study, firms like Uber and Lyft are referred to as ride hailing
services.
13
month across more than 190 cities in the United States. In October, it announced an annual gross run rate
(total bookings through the Lyft app, before the driver’s commission) of $1 billion.
Despite the new round of funding in early 2016, Lyft has only a fraction of the capital available to its
larger competitor, Uber, which has raised more than $13 billion, 6 times more than Lyft. Moreover, Uber,
which is also developing its own autonomous-vehicle technology, is valued at $$64.6 billion, a figure
larger than GM’s $53 billion market value. To leverage its relatively limited financial resources, Lyft has
been working to catch up to Uber by teaming up with ride hailing competitors in Asia like Kuaidi, Ola, and
GrabTaxi to expand. It has also struck deals with major brands like Starbucks and pop stars like Justin
Bieber to broaden its appeal. Lyft also teamed with Hertz to offer rental cars to drivers who do not own
vehicles, and it has reached an agreement with Shell Oil that gives gasoline discounts to Lyft drivers in a
handful of cities.
The longer term vision for the partnership is that the two companies can combine GM’s experience in
manufacturing and autonomous technology with Lyft’s mobile software and infrastructure to create a self-
driving car network that might be cheaper and more ubiquitous than any existing ride hailing business
models. Such a network would be similar to the way Uber and Lyft operate today. Each offers a fleet of
cars that respond to a request from a consumer’s mobile phone request. However, the key difference would
by the use of autonomous driving cars to replace drivers and slash labor costs while improving productivity
by allowing a company to keep cars in service constantly. In concept, a company owning the proprietary
technology from the artificial intelligence to make the network function efficiently to car manufacturing to
consumer software and fleet ownership could have a huge advantage over other players. How? Owning all
aspects of the network improves the likelihood they are operationally compatible.
GM has been developing its own autonomous car technology for several years in anticipation of
launching a fleet of self-driving Chevrolet Volt plug-in hybrid cars. The investment in Lyft will provide
GM with a practical means of understanding the ride hailing market and offers an important platform for
generating fees for the firm by facilitating a more cost efficient car sharing network. It also gives G.M. an
extra market for its vehicles. For Lyft, G.M.’s support includes more than financial backing. As part of the
investment, G.M. and Lyft will work on developing an on-demand network of self-driving cars, an area of
research that companies like Google, Tesla and Uber have all devoted enormous resources to in recent
years.
While the proposed network has considerable conceptual appeal, there are numerous roadblocks that
must be overcome: some regulatory, some technical, some human behavior, and some cultural. Regulatory
considerations entail concerns about the safety of autonomous driving cars and the potential for liability. In
late 2015, California passed legislation requiring a driver to be behind the wheel of a self-driving vehicle at
all times. This would preclude the labor cost reduction presumed in the GM-Lyft network concept. Like
any new technology, it is likely to take years for consumers to accept the driverless car concept putting the
realization of the proposed network years into the future. Finally, the behemoth GM has a large and often
ponderous bureaucracy as compared to Lyft’s. Lyft’s corporate culture is more likely to reflect nimbleness
and informality in contrast to GM’s more structured and risk adverse way of decision making.
14
experimenting with Car2Go, a Zipcar-like service2 that offers Daimler smart car rentals in urban areas like
Brooklyn, Berlin and Toronto.
What began as a race to turn driverless cars into a form of mainstream transportation is now moving on
to its next stage. This is occurring even before the first stage has been completed. This next stage is a
business model based on personal mobility in which consumers have instant access to cars you don’t have
to own. Will the shift to autonomously driven car networks hurt GM’s traditional business? GM argues it
will not as it represents a broadening of the choices for consumers not wanting to own their own cars. It is
viewed a complementary to its core car manufacturing business: GM can generate a revenue stream by
owning a ride hailing operation as well as by selling cars to those who choose to own them. GM notes that
the most profitable part of its business has been for years its truck and SUV business whose sales are made
primarily to people living in less densely populated areas. In contrast, ride hailing/sharing is likely to be
mostly an urban phenomenon and offers a new revenue stream for the company.
Discussion Questions:
1. What alternatives to a partnership with Lyft did GM have? Why was a partnership selected as
the means of implementing the firm’s strategy to enter the ride-hailing business?
2. Who do you believe benefitted most from the partnership (GM or Lyft) and why?
3. In addition to risk sharing, what other motivations existed for GM and Lyft to partner?
4. Speculate as to why GM invested in Lyft rather than other ride hailing services such as Uber?
2Zipcar is an American owned subsidiary of Avis Budget Group, which provides automobile reservations to
its members, billable by the hour or day. Zipcar members pay a monthly or annual membership fee in
addition to car reservation charges.
15
5. Of the risk factors mentioned in the case study, which do you believe is the most likely to
prevent the realization of the partnership’s vision of achieving a car hailing network of
autonomous driving cars? Explain your answer.
COMCAST’S NBCUNIVERSAL INVESTS IN BUZZFEED and
VOX IN A SEARCH FOR A YOUNGER AUDIENCE
______________________________________________________________________________________
Key Points
Firms may make minority investments in other companies to gain access to skills, assets, and customers
they do not currently possess.
While money invested in alliances does matter, the eventual success of alliances often depends on the value
of the intangible and tangible assets contributed by each partner.
Large companies often attempt to hedge their investments by making a number of relatively small
investments in different firms in the hope at least one will be wildly successful.
______________________________________________________________________________________
The media world is in turmoil. The median age of prime-time TV viewers rose from 46.3 to 50.5 in the past
five years, according to Horizon Media. Less than one quarter of people aged 18 to 34 watch prime-time
TV today, compared to 53.1% of those over 55. Younger people are fleeing in droves to watch online
content and videos. Increasingly, the big name media firms are in a panic as they see their customers
increase in age. Advertisers tend to be attracted mostly by younger viewers who tend to spend more
impulsively and often more lavishly than baby boomers. Not knowing precisely what to do, large media
companies are struggling to adapt to the changing demographics.
Self-described as a social news and entertainment online firm, BuzzFeed was founded in 2006. The firm
has grown into a global media company providing news on a wide range of topics which have specific
appeal to a younger audience. In mid-August, 2015, Comcast’s NBCUniversal subsidiary invested $200
million in BuzzFeed in an effort to gain access to younger viewers. The equity stake values BuzzFeed at
almost $1.5 billion, almost twice its mid-2014 valuation. The BuzzFeed investment comes a week after
NBCUniversal made another $200 million equity investment in BuzzFeed competitor Vox Media, the
parent company of sites like The Verge, Vox, and SB Nation.
More than half of BuzzFeed’s 82.4 million unique monthly visitors are between the ages of 18 and 34,
according to comScore Inc. Prior to the NBCUniversal investment, BuzzFeed had raised $96.3 million in
five investment rounds. Last year, it raised $50 million from venture capital firm Andreessen Horowitz,
valuing the company at $850 million. BuzzFeed used much of that money to invest heavily in BuzzFeed
Motion Pictures, its Los Angeles-based video production unit. According to Quantcast, Vox gets about 75
16
million unique visitors a month to its various content sites, with about 40% of its traffic between 18 and 34
years of age. Vox is spending aggressively to grow its advertising business and as such is losing money and
burning through its available cash. The NBCUniversal investment in Vox Media valued the company at
almost $1 billion. While the number of monthly visitors for both firms is impressive, both BuzzFeed and
Vox are much smaller than sites like the Huffngton Post which gets more than 125 million monthly
visitors.
While Vox has raised considerable sums of money from venture capital firms, its appetite for
additional cash seems open ended. Most of the firm’s earlier funding came from venture capital firms
which sometimes have short investment time horizons. The most stable and “patient” capital often comes
from a strategic partner like Comcast. Substantially larger than Vox, BuzzFeed is also trying to grow
extremely quickly, which means it also needs funding.
Given the soft nature of the presumed synergy between NBCUniversal and upstart media companies,
BuzzFeed and Vox, it remains to be seen how much NBCUniversal and its parent Comcast will actually
benefit. At a minimum, Comcast may recover its investment and earn a return on its investments if they go
public. But whether they will be able to change their much larger culture to reflect the creativity of
BuzzFeed and Vox is problematic. In reality, what Comcast is really providing is cash and maybe some
content, although much of what Comcast has to offer is of little interest to millennials. So Comcast is
doing what many large companies do when their creativity runs dry: they throw money at smaller fast
growing firms in the hope that at least one of these relatively small bets will take off. This “big company”
strategy is not very imaginative but it is sometimes successful.
Comcast Completes the Takeover of NBCUniversal
Case Study Objectives: To illustrate
• The use of joint ventures as an exit strategy and
• Phased transactions
__________________________________________________________________________
Culminating a four year effort to exit the media and entertainment business, General Electric (GE)
announced on February 12, 2013 that Comcast Corporation (Comcast) acquired the remaining 49%
common equity it did not own in NBCUniversal (NBCU). In addition, Comcast also agreed to acquire the
properties occupied by NBCU at 30 Rockefeller Plaza and CNBC’s headquarters in Englewood Cliffs, New
Jersey. As the nation’s largest cable TV provider, Comcast generates about two-thirds of its revenue from
its cable operations, with the remainder coming from NBCU.
While GE had been reviewing its business portfolio for some time, the decision to undertake a radical
restructure of its operations was accelerated by external events. Forced to shore up its big finance business
severely weakened by the 2008 global financial crisis, GE moved quickly to raise capital. GE’s decision to
sell NBCU also reflected the deteriorating state of the broadcast television industry and a desire to exit a
business that never quite fit with its industrial side. NBC has been mired in fourth place among the major
broadcast networks, and the economics of the broadcast television industry had deteriorated amid declining
17
overall ratings and a reduction in advertising. While NBCU had been profitable in 2009, it was expected to
go into the red in subsequent years. Unable to find a buyer for the entire business at what GE believed was
a reasonable price GE sought other options including combining the operation with another media business.
After extended discussions, GE and Comcast announced a deal on December 2, 2009, to form a joint
venture consisting of NBC and selected Comcast assets. The agreement called for Comcast to own a 51%
stake in NBCU, with GE retaining 49% ownership. The deal did not close until January 2011, due to
lengthy negotiations with regulators. To satisfy regulators, the JV had to agree make concessions designed
to prevent it from limiting competitor access to NBCU content.
Buying entertainment properties runs counter to decisions by Comcast peers Time Warner and
Cablevision systems, which decided to separate content from distribution. Previous attempts to vertically
integrate by owning and distributing content have shown mixed results. For example, AOL’s acquisition of
Time Warner in 2001 ended in failure largely because the cultures of the two firms did not mesh. Some
media companies have successfully merged—for example, Time Warner’s merger with Turner
Broadcasting. Having learned from AOL’s rush to achieve synergy, Comcast is allowing the NBCUniversal
JV to operate independently of the parents and is sharing the risk with GE.
The deal reflected complicated financial engineering involving both parties contributing assets to create
a joint venture, agreeing on the total value of the endeavor, determining the value of each party’s
contributed assets to determine ownership distribution, and finally determining how GE would be
compensated. The joint venture transaction based on the value of the assets contributed by both parties was
valued at $37.25 billion, consisting of GE’s contribution of NBCU valued at $30 billion and Comcast’s
contribution of cable network assets valued at $7.25 billion. The ownership interests were determined
based on the value of the contributed assets and cash payments made to GE. In exchange for contributing
NBCUniversal operations valued at $30 billion to the JV, GE received $15.6 billion in cash ($6.5 billion
from Comcast + $9.1 billion borrowed by the NBCUniversal JV) and a 49% ownership interest in the joint
venture. In exchange for contributing $7.25 billion in cable network assets to the JV and paying GE $6.5
billion in cash, Comcast received a 51% interest in the NBCUniversal JV.
the put option.
What is perhaps most remarkable about Comcast’s early 2013 announcement that it would purchase the
remaining portion of NBCU that it did not own is that it is coming much earlier than expected. While
Comcast had intended to acquire GE’s 49% eventually, a confluence of events accelerated this process. The
decision appears to have been driven largely by Comcast’s belief that it would end up paying substantially
more for GE’s ownership interest if it had waited until 2018 as was envisioned when the joint venture was
created in early 2011. The decision also reflected Comcast’s growing confidence in the ongoing viability of
TV, even as the growth of Internet video reshapes the entertainment landscape, and the more rapid than
expected turnaround in NBCU’s financial performance. Broadcast TV revenue rose by 5% in 2012; theme
parks, Universal Pictures movie studio and pay TV networks such as USA and SyFy, also grew. GE
appears to have been motivated to sell at an earlier date due to its desire to accelerate investment in its
industrial and infrastructure businesses and to eliminate any distractions in executing their current business
strategy. The firm plans to use the proceeds to repurchase stock and to invest in its core industrial
businesses.
Other factors spurring the deal may have included cultural clashes between the more formal and cost
conscious Comcast and NBCU’s staff, record low borrowing costs, and rising retransmission and
programming fees that NBCU can charge other pay TV operators for the broadcast and cable networks.
While Comcast’s cable margins are shrinking due to rising operating costs, NBCU’s margins are expected
to increase due to their ability to charge for content and the expectation that such fees will continue to rise
in the future. Complete ownership of NBCU will let Comcast benefit from the rising price of payments
made for the rights to show certain sporting events and other TV programs as Comcast will own 100% of
such content. Long-term rights deals between TV networks and their cable and satellite distributors have
bolstered the importance of TV.
The deal values NBCU at $34 billion, not including $5 billion in debt. That is 13% higher than two
years earlier when Comcast bought a controlling stake valuing NBCU at $30 billion, excluding debt. It
would appear that Comcast acquired NBCU at a very attractive price when compared to CBS’s stock price
which has doubled and Disney’s share price which rose by 41% during the same period. Investors seemed
to applaud the terms of the deal by bidding up both Comcast’s and GE’s share prices.
Discussion Questions:
1. Speculate as to why GE may have found it difficult to manage NBC Universal. Be specific.
2. What are the critical assumptions underlying Comcast’s decision to exercise its option to
acquire the remainder of NBCU that it did not own at an earlier date than anticipated? What
are GE’s?
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3. Explain why GE might have been willing to accept subordinated debt and preferred stock for
such a large part of the purchase price? Why might Comcast want to use debt and preferred
equity as part of the purchase price?
4. In what way can the Comcast/GE JV created in 2011 be viewed as a phased entry strategy
into owning content for Comcast and as a phased exit strategy for GE?
5. What is the form of payment and acquisition? What portion of the purchase price might be
immediately taxable to GE and on what portion might taxes be deferred and why?
Coke Moves from the Vending Machine into the “In-Home” Market
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Key Points
• Business alliances can provide comparatively low cost access to new product distribution
channels.
• While money invested in business alliances does matter, the eventual success of alliances often
depends on the value of the intangible and tangible assets contributed by each partner.
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Henry Ford was quoted as saying about the iconic Model T car that “the consumer could have any color
they wanted as long as it was black.” Businesses have long since learned that the key to successfully
growing a business was meeting or exceeding primary customer needs. We have moved from mass
merchandizing (one size fits all) to mass customization (products reflecting a consumer’s tastes). The desire
of consumers to tailor products to reflect their own desires seems to have made it into the soft drink market.
With the overall U.S. non-alcoholic beverage market showing little growth in recent years, beverage
makers are seeking ways to spur new sales. Energy drinks and single serve coffee is growing at a double-
digit clip offsetting declines in the carbonated beverage market. But a new market for in-home custom
beverage systems has emerged in recent years and represents potentially a substantial growth opportunity.
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Israeli-based SodaStream International has had a virtual monopoly on “in-home carbonization systems.”
Its machines allow consumers to make their own sparkling water as well as drinks that blend multiple
flavors. The firm sells “do-it-yourself” carbonation machines as well as the flavor syrups used in the
machines. Reflecting the popularity of its product, the firm has been able to double its annual revenue each
year since 2011. Its machines are currently in more than 7 million homes, with the majority outside the
U.S. Furthermore, SodaStream has exclusive licensing deals with such popular brands as Kool-Aid, Ocean
Spray, Crystal Light, and Country Time Lemonade. However, the firm is vulnerable in that it lacks a well-
known soft drink brand.
SodaStream’s success forced Coca-Cola to take notice. In a move that represents a significant departure
from its traditional business, Coke entered into a partnership with Green Mountain Coffee Roasters in 2014
to in effect move its products from the vending machine into the kitchen. The nation’s leading beverage
maker inked a 10 year agreement with Green Mountain to sell coke products that are compatible with
Green Mountain’s in-home cold beverage system. Many consumers already are familiar with Green
Mountain’s single serving coffee machines.
The ability to use the machine to make well-known brand name drinks is expected to hype sales of the
machines. Green Mountain CEO Brian Kelley emphasized this point by noting that “In hot beverages, the
power of Keurig (coffee machines) comes from the fact that we have the world’s best coffee brands on it.”
The major selling point for the Keurig Cold system is that it will have the best cold beverage brands on it
such as Coke. Since the deal is not exclusive, Green Mountain can look for deals with other companies to
expand the range of cold beverages available on the machine.
The agreement represents an effort by Coke to broaden its product offering beyond the traditional Coke
products it has been selling in fast food restaurants and vending machines for years. Coke has been able to
grow its earnings consistently in recent years by expanding its product portfolio to include such brands as
Sprite, Minute Maid, Powerade and Vitaminwater. With annual revenues of more than $50 billion annually,
the firm is 100 times the size of SodaStream. With its massive scale, brand recognition, and marketing
strength, Coke expects to be able to boost sales of the machines and in turn its products worldwide.
Nokia Gambles on Microsoft in the Smartphone Wars
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Key Points
An alliance may represent a low-cost alternative to a merger or acquisition.
